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951 Broker's Digest

The Edge Singapore
The Edge Singapore • 9 min read
951 Broker's Digest
Take a look at these six stocks these week, including Capitaland Mall Trust, Sembcorp Industries and ComfortDelGro.
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Ho Bee Land
Price target:
CGS-CIMB “add” $2.70

Higher target price on prospects of steadier recurring income

Ho Bee Land’s investments totalling about $250 million — made in the past six months — have prompted CGS-CIMB Research to raise its target price for the property developer to $2.70 from $2.56 previously, on prospects of a stronger recurring income stream.

The brokerage has maintained its “add” rating for the stock. “We continue to like Ho Bee for its strong recurring income profile, derived from rentals in Singapore and UK,” CGS-CIMB analyst Lock Mun Yee writes in her Sept 11 note.

In March, the company won a land tender at Biopolis P6 at one-north for $223.6 million, which is not too far from its existing property The Metropolis. The mixed-use bio-medical sciences (BMS) development, which is expected to complete by the end of 2022, will see the construction of a business park, office and retail space.

CGS-CIMB has estimated a gross development value of $400 million to $450 million for the property and a net yield on cost of 5% to 6% on completion.

In June, Ho Bee Land acquired two residential land parcels in Australia’s Queensland for A$23.5 million ($23.38 million). These acquisitions can yield a total of 665 land lots and will enable the company to replenish its development landbank in Australia and extend forward development income visibility, says CGS-CIMB.— Jeffrey Tan

Sembcorp Industries
Price target:
OCBC “hold” $1.27

Downgrade on possibility of removal as STI component stock

The research team at OCBC Investment Research has downgraded Sembcorp Industries to “hold” from its previous “buy” recommendation in June.

Following the official demerger between Sembcorp Industries and Sembcorp Marine in August, shares in Sembcorp surged about 50% till the close of Sept 9.

The marine segment, which has been a drag on Sembcorp, is no longer there. This allows Sembcorp to focus on its suite of energy, utilities and urban solutions.

That said, the above factors have largely been priced in after the “significant share price appreciation”.

“While we remain constructive on the name, the market may need more concrete evidence of earnings growth for the next leg up,” says the team in a report dated Sept 10.

To that end, the team is also on the lookout of the possibility of Sembcorp dropping out of the benchmark Straits Times Index (STI) following the drop in its market capitalisation after the demerger.

“This could weigh on the share price”, the team adds.

Shares in Sembcorp adjusted downwards to account for the distribution. On that, the team has adjusted its estimates, and its sum of the parts (SOTP)-based fair value is now $1.27, implying a 0.75x price-to-book value.

Potential catalysts for the stock include an increase in oil prices, accretive acquisitions in the region at reasonable valuation multiples and unlocking of value in its subsidiaries and associates.

However, a decline in macroeconomic factors, plunge in oil prices, a drag in its India business as well as acquisition and integration risks could cause risks in the company’s valuation. — Felicia Tan

Frencken Group
Price target:
UOB Kay Hian “buy” $1.37

Poised for a earnings recovery in 2H2020
UOB Kay Hian’s Clement Ho has maintained his “buy” rating on Frencken Group with a target price of $1.37 on the expectation of a stronger 2H2020 earnings.

Ho notes that demand for semiconductor components remains strong. The semiconductor segment is estimated to contribute 32% and 35% of sales for Frencken in FY2020/2021F respectively.

This will be driven by the huge demand stemming from the accelerating development of 5G technology, reflected in the record capital expenditure (capex) spending by major foundries TSMC and Samsung in FY2020/2021.

Following some supply chain issues caused by the Covid-19 lockdown in 1H2020, the management has indicated that the majority of the issues has been resolved and factories are back in full operations and working to meet clients’ urgent deliveries.

Ho also said factory utilisation is understood to be high and demand from clients currently outstrips production capacity. This reflects a “healthy pricing environment” for the components manufactured by Frencken, which is managing the delicate balance between maintaining clients’ relationships and maximising revenue opportunity.

Furthermore, Frencken is deepening its core competency to provide niche components, modules and designing of the whole product. The group has been moving away from the built-to-print model like contract manufacturing, which does not provide any value add to clients, Ho adds.

For instance, Frencken is the sole global supplier of the reticle masking unit (REMA), a key module for the Extreme Ultraviolet (EUV) lithography system developed by ASML. Apart from the mechanical design, assembly and test, Frencken also manages the supply chain and provides lifecycle support for REMA.

He believes that the stock is “poised for recovery” in 2H2020 and that the management will make up for the shortfall of orders in 1H2020. As such, this should result in improved q-o-q earnings, with share price anticipated to move in tandem.

The group’s “improvement of operational efficiency has shown marked progress, and is expected to further bolster earnings before interest, taxes and amortisation (Ebitda) margin going forward,” Ho notes. Frencken’s FY2018/2019 revenue rose at a compounded annual growth rate of 13.1%, while Ebitda saw a marked improvement of 32.1%, mainly bolstered by the impressive 9.6% reduction in selling, general and administrative expenses (SG&A).

He expects FY2020-FY2022 Ebitda margins to normalise above 11%, compared to below 9% between 2014 and 2017. Additionally, management continues to make investments to upgrade equipment and facilities to elevate its competitive edge and enhance capabilities, which should help further lift efficiency. — Lim Hui Jie

Price target:
DBS Group Research “buy” $1.96

Top pick for Singapore land transport sector
DBS Group Research analyst Andy Sim has picked ComfortDelGro (CDG) as his top pick for the land transport sector, maintaining his “buy” rating on the counter with a target price of $1.96.

He believes valuations are attractive at 1.2x price-to-book value (P/BV) which is –2 standard deviation (SD) of historical mean, and he said that the market has not priced in Phase 3 recovery for CDG.

The Land Transport Authority (LTA) on Sept 15 announced an additional $112 million in the Special Relief Fund (SRF) to support the so-called Point-to-Point (P2P) transport industry. In the same statement, LTA indicated that with the resumption of some activities in Phase Two, demand for taxi and private hire cars (PHC) has increased but ridership is still around 70% of pre-Cov- id-19 levels.

The bulk of the SRF ($106 million) will go towards providing rental reliefs for active taxi and PHC drivers. This amounts to rental relief of about $10 per day per vehicle, same as the original re- lief announced earlier in February.

With that, LTA indicated that taxi operators have also pledged to continue providing matching rental rebates worth a total of $29 million to hirers.

For CDG, it has also announced a 25% rental waiver for its hirers from Sept 16 to Oct 31. He estimates that on average, the waiver could amount to about $30 per day, of which $10 is from the government’s SRF.

CDG has also indicated that it would continue to at least match the $10 per day provided by the SRF, which the Government will extend till March 2021. — Lim Hui Jie

Tuan Sing Holdings
Price target:
DBS Group Research “buy” $0.44

Gain from recent divestment yet to be factored in share price

DBS Group Research has maintained its “buy” call for Tuan Sing Holdings with an unchanged target price of 44 cents as it believes that the undervalued company may realise its upside potential.

According to DBS analyst Derek Tan, the company is currently trading between one and two standard deviations below its three-year mean.

The low valuations could be due to Tuan Sing’s high net debt-to-equity and low interest coverage ratio.

Nevertheless, Tan reckons the company’s share price may have yet to fully price in the completion of the Robinson Point sale and may appreciate further once the deal is confirmed.

Moreover, GulTech — the company’s printed circuit board manufacturing arm — looks set to continue riding the semiconductor upcycle.

A recovery in the company’s Australian hospitality business may be also on the cards as the Covid-19 crisis there subsides.

“Trading at 0.3 times net asset value, we continue to see good value in the stock,” Tan and the research team write in a note dated Sept 15. — Jeffrey Tan

CapitaLand Mall Trust
Price target:
Daiwa Capital Markets “buy” $2.65

Top S-REIT pick ahead of proposed merger
Even with a proposed merger on the horizon, CapitaLand Mall Trust (CMT) remains a top pick, says Daiwa Capital Markets analyst David Lum. The merger could be distributed per unit (DPU) neutral over FY2021-2022 before reaching positive DPU accretion of 1%-2% from FY2023, he adds in a Sept 11 note.

Lum is maintaining his “buy” call on the trust, with an unchanged target price of $2.65.

CMT and sister REIT CapitaLand Commercial Trust (CCT) are proposing a merger through a scheme of arrangement, in which unit holders of both RE- ITs will be voting for on Sept 29 to form CapitaLand Integrated Commercial Trust (CICT). If approved by unit holders, the merger would turn CICT into the largest pure-play retail REIT on the SGX.

“CMT will no longer be a pure Singapore-retail recovery play following the merger. Nonetheless, we believe the merger would still be worthwhile for unitholders although it might not be evident based on short-term DPU accretion,” writes Lum.

He now sees CMT’s major attraction as the long-term redevelopment and value-creation potential of the CICT portfolio, by far the largest in Singapore with nine assets each worth more than $1 billion and eight assets worth between $500 million to $1 billion. “We believe the only way for CICT to enjoy industry-low cost of capital is to achieve sustainable industry-leading DPU growth, and the only way to achieve it, in our opinion, is through opportunistic and well-executed development and redevelopment activity.”

“We see the short-term uncertainty over CICT’s ability to execute its strategy as a major investment opportunity as CMT units are now trading near cyclical-low valuations and offer exceptional value,” notes Lum.

If all approvals are obtained at the EGMs, CCT will have a development headroom of around $5.8 billion. This would be more than sufficient for the re-development of Capital Tower into an integrated development, which would require between $1.5 billion and $2 billion.

Another asset that a potential CICT could re-develop is Plaza Singapura and The Atrium Orchard, as the Orchard Road area is expected to be further developed into a lifestyle destina- tion with more innovative and unique non-retail offerings. — Jovi Ho

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